International Paper 2014 Annual Report Download - page 77

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The fair value of our debt and financial instruments
varies due to changes in market interest and foreign
currency rates and commodity prices since the
inception of the related instruments. We assess this
market risk utilizing a sensitivity analysis. The sensitivity
analysis measures the potential loss in earnings, fair
values and cash flows based on a hypothetical 10%
change (increase and decrease) in interest and
currency rates and commodity prices.
Interest Rate Risk
Our exposure to market risk for changes in interest rates
relates primarily to short- and long-term debt obligations
and investments in marketable securities. We invest in
investment-grade securities of financial institutions and
money market mutual funds with a minimum rating of
AAA and limit exposure to any one issuer or fund. Our
investments in marketable securities at December 31,
2014 and 2013 are stated at cost, which approximates
market due to their short-term nature. Our interest rate
risk exposure related to these investments was not
material.
We issue fixed and floating rate debt in a proportion
consistent with International Paper’s targeted capital
structure, while at the same time taking advantage of
market opportunities to reduce interest expense as
appropriate. Derivative instruments, such as interest
rate swaps, may be used to implement this capital
structure. At December 31, 2014 and 2013, the net fair
value liability of financial instruments with exposure to
interest rate risk was approximately $9.8 billion and
$10.1 billion, respectively. The potential loss in fair value
resulting from a 10% adverse shift in quoted interest
rates would have been approximately $410 million and
$480 million at December 31, 2014 and 2013,
respectively.
Commodity Price Risk
The objective of our commodity exposure management
is to minimize volatility in earnings due to large
fluctuations in the price of commodities. Commodity
swap and option contracts have been used to manage
risks associated with market fluctuations in energy
prices. The net fair value of such outstanding energy
hedge contracts at December 31, 2014 and 2013 was
approximately a $2 million liability and a $2 million
asset, respectively. The potential loss in fair value
resulting from a 10% adverse change in the underlying
commodity prices would have been approximately $1
million and $2 million at December 31, 2014 and 2013,
respectively.
Foreign Currency Risk
International Paper transacts business in many
currencies and is also subject to currency exchange
rate risk through investments and businesses owned
and operated in foreign countries. Our objective in
managing the associated foreign currency risks is to
minimize the effect of adverse exchange rate
fluctuations on our after-tax cash flows. We address
these risks on a limited basis by financing a portion of
our investments in overseas operations with borrowings
denominated in the same currency as the operation’s
functional currency, or by entering into cross-currency
and interest rate swaps, or foreign exchange contracts.
At December 31, 2014 and 2013, the net fair value of
financial instruments with exposure to foreign currency
risk was approximately a $1 million and a $4 million
asset, respectively. The potential loss in fair value for
such financial instruments from a 10% adverse change
in quoted foreign currency exchange rates would have
been approximately $52 million and $88 million at
December 31, 2014 and 2013, respectively.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
See the preceding discussion and Note 14 Derivatives
and Hedging Activities on pages 70 through 74 of
Item 8. Financial Statements and Supplementary Data.